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  • Expenses deductible over several years – borrowing, decline in value, capital works

    The following expenses for your rental property may be deducted over a number of income years:

    A rental property is generally any real property that you rent out in exchange for income.

    If you own a rental property, you can only claim tax deductions for expenses if the property is rented out or genuinely available for rent.

    Borrowing expenses

    You can claim a deduction for borrowing expenses associated with purchasing your rental property.

    If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less.

    If the total borrowing expenses are $100 or less, you can claim a full deduction in the income year they are incurred.

    Find out about:

    Deduction for decline in value of depreciating assets

    A depreciating asset is one that has a limited effective life and can reasonably be expected to decline in value over the time it is used. For example, a washing machine is an asset that wears out over time and you can claim a deduction for the cost of the washing machine spread out over its expected effective life.

    Special rules can apply to some assets that may allow you to claim deductions for their decline in value (depreciation) more quickly.

    When you purchase a rental property, you are treated for tax purposes as having bought a building, plus various separate depreciating assets, such as air conditioners, stoves and other items.

    Some assets do not depreciate, such as land, trading stock and some intangible assets (for example, goodwill).

    An asset that is fixed to, or otherwise part of, a building or structural improvement, will generally be construction expenditure for capital works and only a capital works deduction may be available for those assets.

    A quantity surveyor will often prepare a report that creates a depreciation schedule for these claims at the time a rental property is purchased.

    The decline in value of a depreciating asset starts when you first use it, or install it ready for use – it doesn't matter whether it is for a private purpose or to earn assessable income. For example, if you purchased an asset on 1 January and used it only for a taxable purpose, you can claim for the decline in value for that half of the year.

    Your deductions need to be reduced for any personal use of the asset. For example, if you use your rental property for private holidays.

    Find out about:

    See also:

    Rental properties – for a list of rental property items that can be depreciated

    Deductions for capital works

    You can claim capital works deductions for construction costs for a rental property that satisfies certain conditions.

    Deductions based on construction costs apply to capital works such as:

    • buildings, or an extension; for example, adding a room, garage, patio or pergola
    • alterations, such as removing or adding an internal wall, or
    • structural improvements; for example, adding a gazebo, carport, sealed driveway, retaining wall or fence.

    Your total capital works deductions cannot exceed the construction costs. No deduction is available until the construction is complete.

    You can only claim deductions for the period during the year that the property is rented or available for rent.

    Repairs on a newly-acquired rental property

    Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property can't be claimed as an immediate deduction but may be claimed over a number of years as capital works deductions.

    Replacing an asset

    If you replace assets such as a complete fence or building, you may be able to claim the cost as capital works deductions.

    If you replace depreciating assets such as a dishwasher or carpets, you may be able to claim the cost as deductions for decline in value.

    Example

    Janet has owned and rented out a residential property since 12 January 1983. In 2018, she replaced the old kitchen fixtures, including the cupboards and appliances. The old cupboards had deteriorated through water damage and wear and tear.

    The kitchen cupboards are separately identifiable capital items with their own function. This means the cost of completely replacing them is a capital cost. Because of this, Janet can claim:

    • capital works deductions for the construction cost of this work
    • deductions for the decline in value of the kitchen appliances (none of these appliances were previously used).

    This is the case regardless of whether:

    • new fittings are of a similar size, design and quality as the originals
    • new cupboards are made from a modern equivalent of the material used in the originals
    • layout and design of the new kitchen may be substantially the same as the original.
    End of example

    See also:

    Last modified: 03 Dec 2018QC 23636